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The New Rules of Remodeling

The New Rules of Remodeling

You may have noticed the lines at home-improvement stores getting longer or heard the whirring of buzz saws in your neighborhood. After years of economic recession and housing-market malaise, people are starting to fix up their homes again.

According to an April 15 report from the Joint Center for Housing Studies at Harvard University, annual spending on remodeling is expected to accelerate this year, with nearly 5% growth over 2009. “This year could produce the first annual spending increase for the industry since 2006,” the peak of the housing boom, says center director Nicolas P. Retsinas.

But the forces driving today’s action are different from those during the boom. Previously, people wanted to renovate their places so that they could trade up to bigger homes, or because they were flush with equity and they wanted to reinvest some of the spoils.

Now, the opposite is happening: Many people who bought during the boom years are accepting the reality that they won’t soon be swapping up for a sybaritic spread. Their mortgages may remain above water, but after a couple of years of falling home prices, their equity is now low and the transaction costs of buying a new house would leave little for a down payment.

In short, they have fewer options.

So these people are making their homes more comfortable for a longer-than-expected stay. Setting aside old calculations of how much a particular improvement will add to resale value, they are making smaller tweaks that can make a big difference in livability. You might call it “psychological return on investment.”

Nowadays, say contractors, smaller projects like updating kitchens and baths and attic-bedroom conversions are more popular, while two-story master suites and $100,000 kitchen blowouts are a little less common.

One of the most cost-effective improvements, say contractors, is removing a wall to create an open kitchen-dining area. The project “makes the kitchen feel bigger and the kitchen and dining room more usable and it’s such a simple thing to do. It can cost as little as a couple of thousand dollars, but can run much higher if plumbing and electrical work are involved.

A surprising number of people fall into the category of being above water on their mortgage but anchored to their property. According to First American Core Logic, at least 24.5 million borrowers in the U.S. have home equity of less than 25%, and of those, 13.2 million are above water. Considering the 9% in commissions and fees that typically come with buying and selling a house, as well as the typical 20% down payment on the new one, it is easy to see why people aren’t house-hopping like before.

Economists, whose models often assume the rationality of hypothetical consumers, say remodeling makes sense for such people. “If they don’t have a lot of equity in their houses and can’t move, they should have a propensity to improve rather than move,” says Richard K. Green, director of the University of Southern California’s Lusk Center for Real Estate. “When you renovate, you save a lot of transaction costs.”

Kelly and Steve King considered buying a larger place to accommodate their growing children, a daughter, 9, and son, 7. But they surmised that buying and selling now would be too expensive. “We didn’t think it was worth the whole sale purchase expense … just to get a few extra square feet,” Kelly says. Instead, they opted to fix up their 1950s-era tract home, worth an estimated $500,000. Most houses in their neighborhood with new kitchens and baths sell for up to $600,000, she says. While their home “is a little squished,” they chose to “gradually improve it,” she says.

In December, the Kings remodeled their kitchen, putting in hardwood floors, cherry cabinets and stainless-steel appliances, ripping out a closet and expanding a doorway to improve the flow. They also installed new incandescent ceiling lights and under-cabinet fixtures, which Kelly says she especially loves.

Because they made no major structural changes, they kept the cost to about $50,000, a bargain in the pricey DC market. It wasn’t easy to hew to that budget, though; the couple decided to ditch a garden window over the sink and self-closing drawers, which would have added several thousand dollars to the cost.

Even in the ever-grander suburbs outside Washington, people are thinking smaller. A few years ago, more people were doing two-story additions, and most people who remodeled kitchens made them larger. Now, on our of the last six kitchens we have done, the footprint stayed exactly the same.

Banks also are making credit less available than they used to. Before the housing bust, banks would often lend for projects based on the value of the house after completion of the project, but they are less likely to do so now because “there’s no guarantee the improvement or the market will lead to price appreciation.” The result: even affluent homeowners aren’t able to borrow as much as they used to.

With little reason to expect huge price gains in the housing market in the next few years, some homeowners are thinking long-term. A remodeling contractor in Milwaukee, says a pair of physicians, as part of a bathroom renovation, recently installed a barrier-free, walk-in shower and higher countertops in their three-story lakefront home built in the 1890′s. They did it “so that as they get older they can wheel in and out with a wheelchair if they should have to,” Ms. Ausavich says. The homeowners are in their mid-40s and, “being doctors, I’m sure they see the gamut,” she says.

Likewise, a marketing and public-relations consultant who resides in Gaithersburg Md., says she and her husband decided to do some basic upgrades on the post-World War II split-level home they have owned for 21 years. She says she would prefer to move to a new high-rise condominium in downtown Bethesda, but that they decided to stay and renovate because it is more cost-effective and they like where they live now and say they are planning to spend in the low $30,000s to update the upstairs bathroom, kitchen and family room.

But the couple have decided to hold off on another dream. “I’ve always wanted an addition, since it is a split level and you can go up or down,” she says. “I’d like another level on top, but that’s the future.”

The New Remodeling Rules

During the bubble, homeowners sought the biggest, splashiest home improvements to boost resale value. Now they’re doing smaller projects that deliver a similar result for a little less money